No Great Stagnation: One Possible Explanation for Low Inflation

     There' a good post by Chris Dillow about productivity and growth. Regarding the British economy, of course, Sumner's long since made this a case of 'See I told you so' though there's less to brag about than he makes it sound. 
   
      http://krugman.blogs.nytimes.com/2014/01/16/france-by-the-numbers/?_php=true&_type=blogs&module=BlogPost-Title&version=Blog%20Main&contentCollection=Opinion&action=Click&pgtype=Blogs&region=Body&_r=0

     While Britain has seen some jobs created and this last year some level of increase in GDP, it's also notably been lagging in productivity. 

     ""Productivity isn't everything, but in the long run it is almost everything." If Paul Krugman's famous saying is right, the UK economy is in trouble because today's figures show that total hours worked rose by 1.1% in the last three months, which implies that output per hour is falling, and is well below its pre-recession peak. And Duncan thinks Krugman is right:

Unless we see a pick-up in productivity growth soon then the UK risks much slower growth, and lower living standards, in the future.

    "But could it be that they are both wrong, and that stagnant productivity and decent output growth are compatible for at least a few more years?"

   http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2014/01/who-needs-productivity.html

      On the other hand Dillow makes this point:

     "But there's something wrong with this story. As Jon Philpott points out, wage inflation has so far not risen at all in response to falling unemployment. There are several reasons why this might be, which might continue to hold down wages:"

 -   "Unemployment is higher than the jobless count suggests, implying that there's much more pent-up supply of labour. If we add to the unemployment count the inactive wanting work and part-timers wanting full-time work, there are still over six million people unemployed or under-employed. And even if employment grows by 2% a year for the next five years, there'd still be three million jobless on this measure."

    "- Memories of the great recession will have a scarring effect, by making workers scared to push for higher wages."

     "- The mass supply of labour from the far east will continue to hold wagesdown (pdf)."

   "- Pay restraint and job losses in the public sector - the OBR foresees general government employment falling by over 500,000 in the next four years - will hold down private sector wage growth."

    "If these factors continue, we could see more of what we've had recently - GDP growth plus jobs growth without much inflation and hence no need for higher interest rates."

   "This need not imply a squeeze on profits. Wage growth of one per cent and zero productivity growth implies unit wage costs of one per cent. Barring adverse commodity price shocks, this is consistent with stable profit margins at low inflation. And with output growth raising the output-capital ratio, this gives room for profit rates to grow, thus maintaining or even increasing firms's motives to invest."

    This could describe what we've been seeing. It also runs counter to the Right wing idea about a Great Stagnation where supply side structural issues have harmed the economy and are responsible for unemployment. Indeed, however much you buy of this theory one thing is clear-we have very low inflation and a very low level of worker participation in the economy. It's quite plausible that these two are linked and that the 6.7% unemployment rate is misleading. In this case inflation is anything but around the corner and there is still a lot of demand to make up for.

     Sumner agrees that the UR may be misleading but this also gives us more birth for fiscal stimulus. It does wholly contradict his buddy Tyler Cowen's GS which justifies fiscal austerity and 'structural reforms.'